You are correct-the water regulator that's mounted on the water box injects water into the exhaust gas stream that's flowing out of the engine. If there is not any exhaust flow from the running engine, the water will fill the exhaust system. The water level will eventually reach the exhaust ports on the cylinder and flood the engine.

^^^ What he said, except i would like to add that this is why you have to pinch the inlet water line when towing on the water too. If you drag your ski behind another boat or ski on the water there is water forced into the jet pump and through the cooling lines and it fills the exhaust and then the engine just as if you had a hose hooked up and don't have the engine running. If you drag it far enough it will fill the engine, then start running out of the carbs and eventually sink the ski when you finally stop...